ELLSWORTH — A company run by former auto dealer John Linnehan Jr. has agreed to refund $18,000 and change its business practices as part of a settlement with the Maine Attorney General’s Office.
The Attorney General’s Office contends that Linnehan Homes misled aspiring homeowners who enrolled in the company’s “American Dream Path to Home Ownership Plan.”
Attorney General Aaron M. Frey announced on Tuesday that his office had entered into a settlement with Linnehan Homes, which Frey wrote “enrolled consumers in the plan who couldn’t afford it and lost money when they left.”
Some of those who enrolled, Frey said, “believed that they were buying a home instead of renting with an option to purchase.”
Reached by phone on Tuesday, Linnehan “vehemently” denied that his company had broken any Maine laws and said he had “bent over backward” to cooperate with the Attorney General’s Office. (In a press release, Frey “expressed his appreciation for Linnehan Homes’ cooperation in working with his office to reach a resolution that will benefit consumers.”)
Linnehan said he was proud of the system he had invented and had thought of having it patented.
“It was such a unique alternative to existing mortgages,” Linnehan said. “I felt it originally had the potential to overhaul the existing mortgage system as we know it today.”
Under the plan, which Linnehan said he was “not sure” would continue — it is now on hold — Linnehan Homes bought properties in foreclosure or at auction. It then offered those houses on a rent-to-own plan to consumers who had trouble getting a mortgage from a traditional lender because of low credit scores or inadequate credit history.
Once a potential homeowner had enrolled (the company advertised that “Nobody is ever turned down”) and handed over “detailed personal and financial information,” including credit reports, income tax returns, expenses and assets, agents at Linnehan Homes would schedule a “closing.”
At the “closing,” potential homeowners signed a number of documents, including a lease agreement. But the consumer was not buying the home, as some reportedly thought, but renting it with an option to purchase it later.
Also during the “closing,” Linnehan customers were obligated to sign an “option agreement” (renewable every four years) that required them to pay a down payment as well as an annual option payment. The option payment would be applied to reduce the purchase price of the home in the event they chose to buy. But, as part of the plan, the price of the home would increase by 10 percent every four years.
How much each potential homebuyer had to put up for his or her option payment was based on the consumer’s annual tax returns.
As part of the deal, consumers agreed to hand over preparation of tax returns to Linnehan, a practice the Maine Attorney General’s Office called “unfair.”
Both the down payment and any annual option payments were nonrefundable.
The documents included a disclosure stating that the plan is not a mortgage but an “installment purchase plan,” and that unless renters exercise the option they are “not the owner of the real estate.”
But the Attorney General’s Office called this disclosure “inadequate to overcome the misleading impression created by [Linnehan Homes] that consumers in the plan are buying their homes.”
“This rent-to-own plan is a big commitment, and consumers can lose a lot of money if they can’t afford it or if they have to move after several years,” Frey said. “Consumers who are considering Linnehan Homes’ plan should consult with an attorney before enrolling.”
Linnehan said he believed his customers understood the plans.
“We always had clear understanding with every person we worked with,” he said.
Linnehan disagreed with the Attorney General’s contention that the company made statements that were misleading to consumers.
“That’s a false statement in my opinion,” said Linnehan. “That is something in my opinion was totally false” in the “accusations presented to the AG’s office.”
The company began promoting sales of its homes in 2013, according to the settlement document. As of August 2017, Linnehan Homes had enrolled 86 aspiring homebuyers in its plan, according to the complaint. Of those, 42 were current, 38 were terminated and six had “converted” to home ownership after obtaining a mortgage from a lender.
This is not the first time a company run by Linnehan has been investigated by the Attorney General’s Office.
In 2002, Linnehan’s Credit Now Auto Co. and its financing arm, Atlantic Acceptance Corp., agreed to forgive more than $2.8 million in outstanding consumer car loans to more than 600 people as part of a settlement in a lawsuit brought by the state, according to reports in The Ellsworth American. That case was brought under the same statute, the Maine Unfair Trade Practice Act, as that brought against Linnehan Homes.